Atty. Manuel A. Leynes

July 8, 1987 Atty. Manuel A. Leynes c/o 8th Flr.,Philbanking Bldg. 6797 Ayala Ave.,Makati, MM Sir : This relates to your letter, dated July 3, 1987, requesting the opinion of this Commission on the query posed therein in behalf of your client Electro Alloys Corporation. cdlex It appears therein that the board of directors of Electro Alloys Corporation resolved to sell and dispose of all the assets of the corporation to settle the company's obligations with its foreign creditors, manifesting that other than those foreign creditors, the company has no other existing obligations. Said resolution was ratified by the vote of two-thirds (2/3) of the outstanding capital stock of the corporation. Hence, your query as to whether or not Electro Alloys Corporation can proceed to sell all its properties and assets without necessarily dissolving the corporation. The pertinent provision of the Corporation Code of the Philippines reads thus: "SECTION 40. Sale or other disposition of assets . Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. xxx xxx xxx Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. xxx xxx xxx." The sell-out statutes in literal term give the directors acting with the requisite percentage of shareholders an absolute power to dispose of the corporate assets in their discretion. The courts, however, have imposed certain equitable limitations against abuse of powers. Thus, the majority cannot use a sale of assets as a device to freeze out a minority, or to exercise their power in a way to buy in the property for themselves and exclude the minority from a fair participation in the fruits of the sale. (Ballantine on Corporations, sec. 285, at 672-673). Our sell-out statute embodied in Section 40 of the Corporation Code prescribes certain restriction when it expressly provides that the sale or other disposition of assets of a corporation is subject to the provisions of existing laws on illegal combinations and monopolies. Furthermore, under Act No. 3952, as amended, otherwise known as the Bulk Sales law, the sale of all or any portion of a stock of merchandise otherwise than in the ordinary course of trade shall be fraudulent and void against creditors of the seller, unless the seller delivers to the purchaser a list of his creditors and the purchaser in turn notifies such creditors of the proposed sale a stipulated time in advance. (Agbayani, Commercial Laws of the Philippines, Vol. 2, 1978 revision, p. 676, citing Connecticut Steam Brown Store Co. v. Lewis, 86 Cann. 386). Section 2 of the Bulk Sales law provides in part: "SECTION 2. Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor, or any sale, transfer, mortgage, or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act: Provided, however, That if such vendor, mortgagor, transferor, or assignor, produces and delivers a written waiver of the provisions of this Act from his creditors as shown by verified statements, then and in that case the provisions of this Section shall not apply." Hence, subject to the above legal limitations, Electro Alloys Corporation under the facts given in your letter may proceed to sell all its properties and assets without dissolving the corporation. Some recognized authorities in corporation law commented thus: " A transfer of all the property and franchise of a corporation does not necessarily dissolve the corporation or terminate the corporate existence ." (6A Fletcher Cyc. Corps.,1968 Rev. Vol.,sec. 2953, Emphasis supplied). "If one corporation sells all of its assets to another corporation and there is no intent to combine, the considerations for the sale could be in cash or other property, and the selling corporation may continue in a state of suspended animation ." (Campos, Campos, The Corporation Code, "Comments, Notes and Selected Cases, 1981 ed., p. 959, citing Ballantine on Corps., 666, Emphasis ours). Your attention is, however, invited to the effect of non-use of corporate charter and continued inoperation of a corporation found in Section 22 of the Corporation Code which provides thus: "If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension of its corporate franchise or certificate of incorporation. cdll xxx xxx xxx." Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner